11/04/2022
At the time of retirement of an employee, the employee is entitled to receive the certain part of amount on periodic basis, as per the terms of the employment. Such periodic payment to employee by the employer is termed as ‘Pension’. The Government employees or Non-Government employees are paid certain part of amount as consideration for their past services to the employer. However, the employer is not bound to pay the pension to employees in every case. Such entitlement is derived from the terms of the employment.
The pension received from the employer or pension fund would be liable to income tax. The income tax liability on pension amount can be computed as explained below:
1. Uncommuted Pension: Pension which is received on periodic basis is termed as Uncommuted Pension. Such Pension is fully taxable under head Salary.
2. Commuted Pension: Many employees are entitled to receive lump sum amount of pension at the time of retirement by surrendering a portion of the Pension and forgo this portion on future periodic payments. Such amount received is termed as Commuted Pension.
• If the commuted pension is received from Govt employer, local authority or statutory corporation, such pension amount is fully exempt u/s 10(10A). In other words, no income tax would be levied.
• If the commuted pension is received from non Govt employer and the gratuity is received, the exemption would be 1/3rd of the 100% of the commuted value.
• If the commuted pension is received from non Govt employer and the gratuity is not received, the exemption would be ½ of the 100% of the commuted value.
For example, a non Govt employee is entitled to receive Rs. 50,000 per month as pension. He opted to get Rs. 6 Lacs as 60% Commuted Pension. Here full value of commuted pension would be Rs. 10 Lacs. Therefore ½ of Rs. 10 Lacs i.e. Rs. 5 Lacs would be exempt u/s 10(10A) and balance Rs. 1 Lac will be taxable under the head Salary.
